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Democracy Is the New Quantitative Easing


Recent elections results in India and subsequent top-performing markets prove that investors shouldn't chase QE.

Democracy is when the indigent, and not the men of property, are the rulers.
-- Aristotle
India is proof that democracy is more powerful than quantitative easing. There has been much written over the excitement of India's election results, with many arguing that a new era is coming in the world's largest democracy. Oddly, talk of India as a "Fragile Five" member has gone quiet, but make no mistake about it: If everyone is talking about a crisis, it either already happened or it never will. The crisis in India never existed, and a massive up-move has seemingly taken everyone by surprise.
Last year, the Federal Reserve's QE program was credited for sending the S&P 500 (INDEXSP:.INX) up 30%. The WisdomTree India Earnings Fund ETF (NYSEARCA:EPI) is up about as much so far in 2014, with no stimulus in place. The narrative that QE is so effective seems to be at odds with the reality of how other countries have behaved. Markets don't move based on money -- they move based on hope. Clearly that hope can be a powerful force in the beginning stages of a sea change on the fiscal side. Sometimes that hope lasts, sometimes not.
In the case of Japan, for example, hope failed to maintain the bull trend. Despite numerous intelligent arguments for why Japan is due for prolonged strength, nearly all of last year's huge move on Abenomics occurred in the first five months of the year. Take a look below at the price ratio of the WisdomTree Japan Hedged Equity Fund (NYSEARCA:DXJ) relative to the S&P 500. As a reminder, a rising price ratio means the numerator/DXJ is outperforming (up more/down less) the denominator/SPY. A falling ratio means underperformance.

Click to enlarge
Japan on a relative basis has been an abysmal performer. Democracy and the return of Abe caused a lot of hope for escape velocity, but markets simply haven't reflected that for nearly a year now, despite continued QE by the Bank of Japan. India may be undergoing a similar situation, although clearly the reflation/debt trap dynamics are very different, as well as the country's growth prospects from a demographic and industrialization standpoint. However, the notion that one should chase QE is simply invalid. India is proof of that, with its markets now being the best-performing on a global front since March 2009. 
I'll take the will of the people over the will of the Federal Reserve any day.  How about you?
Twitter: @pensionpartners
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